Multi-Strategy Model Portfolio Market Wrap - May 2023
The banking crisis continues into the month
Another bank, First Republic, bite the dust as PacWest and Western Alliance came under stress in the first week of the month. While the media have shifted the focus away from the banking crisis, it does not mean that everything is back to normal. Numerous industry experts and veterans are still concerned as the underlying threat has not gone away. As long as interest rates remain high, the pressure will be on.
Economic data tilting on the positive side and beating estimates
This month we saw non-farm payrolls smashing expectations with unemployment dropping further to 3.4%. That was also accompanied by an increase in labor participation and wage growth showing an exceptionally resilient labor market. The preliminary estimate of the GDP for 1Q 2023 also came in at 1.3% which is higher than the 1.1% expected. And to cap the close of the month, JOLTs hit the high end of forecasts.
Strong performance from the technology sector is in sharp contrast with the rest of the market
Technology stocks staged a strong performance this month on the back of upbeat earnings and riding on the AI wave. Nasdaq 100 ETF (Ticker: QQQ) jumped 7.9% while tech-heavy S&P 500 (Ticker: SPY) also rose 0.5%. This is in sharp contrast with the broad market where most of the sectors actually fell this month. Only the discretionary, technology, and communications sector bucked the trend.
Inflationary pressure did not ease as fast as hoped as core inflation remained sticky
While headline inflation increased at a slower pace than expected, that was largely driven by a fall in food and energy prices. PCE core inflation, the Fed’s preferred gauge of inflation released this month, however, was higher than the consensus estimate. This is an indication that price pressure remained rooted in the core goods and services outside of food and energy.
Fed funds and interest rate expectations rose
FOMC hikes rates by another 0.25% this month. They soften their stance and pave the way for the possibility of a pause but talk down on cuts. Their minutes also revealed that not all members were in favor of a pause. The market initially priced in rate cuts as soon as July possibly in anticipation of a recession. But as data released across the month showed a more resilient labor market and economy coupled with sticky inflation and stock market strength, this pushed expectations back up. At this moment, the market is even leaning towards a possible 0.25% hike for July and cuts are pushed back to November.
Debt ceiling talks again
The debt ceiling talks dominated much of the media's coverage as it went back and forth with no resolution in sight. It was much in focus because if the US failed to raise the debt ceiling in time, it will default on its debts and run out of funds. The consequences would be disastrous. The reaction had been mild considering the catastrophic impact if the talks fell through. That is because no one really expects the US to ever get there. Any positive gains the politicians can get out of pushing their agenda through pales in comparison to the pain everyone will be hit with if they allow the US to default. So unsurprisingly, they have come to a compromise. At this juncture, the bill has passed the US House and the ball is now in Senate's court.
MODEL PORTFOLIO UPDATES
This is a month where most asset classes are headed south except for US large caps which are pulled up by big tech names. But having said that, the performances across the different equity sectors show a large divergence. Except for the discretionary, technology, and communications sectors, all the rest were in the red. Our model portfolio benefitted this month from its sector picks in discretionary and technology and some exposure to the broad market large caps. But the top performer remains its volatility trades which have maintained their shorts for the month. The profits from these winners are able to more than offset losses coming from our model's position in Treasuries and Gold.
Overall, the model portfolio is up +0.6% for the month and +7.0% YTD.
* This is the model performance of portfolios constructed using more advanced strategies than those taught in our courses. They can be implemented with the assistance of an iFAST Global Markets (Singapore) senior investment adviser. Note that live performance may vary due to execution price slippages, the difference in sizing precisions, etc.
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